First Industrial: Focus On Development, Not Distributions


First Industrial Realty Trust’s share price (NYSE:FR) increased by 5 percent following the announcement of the second quarter results. Q2 2015 was stronger than Q2 2014 as occupancy advanced 210 basis points to 95.1 percent, reaching the company’s goal before the year-end timeline. Also, rental rates increased by 4 percent on a cash basis. Growth in both occupancy and rental rates explains the 4.7 percent increase in cash same-store NOI, which is a strong indicator of internal growth.

Development has been a priority for First Industrial, which has 1.5 million square feet under construction and owns land that can be converted into 7.9 million square feet of industrial developable gross lease area. Acquisitions have not been completely out of the question, but they are targeting only selected areas. FR has developed at around 7 percent cap rates and has acquired and sold around 5 percent cap rates. Were First Industrial a sole property, the cap rate would be in the low 7 percent. Given the risk of development, this figure appears to be fair.

fr occupancy by location

With regard to cities, Minneapolis and Indianapolis have both lagged in occupancy. Minneapolis experienced a major move out last year, and there is new market supply. Indianapolis had a move out during Q1. First Industrial bought land in Dallas, where absorption has been strong and where they expect to erect two buildings, and in Phoenix, where yields are at the higher end — 8 percent. FR also purchased properties in Southern California.

The company seems to want to keep its debt profile conservative — their debt has been given investment grade rating — with debt-to-capitalization at 38 percent. Management explained that they expect two major sources of funding: sale of properties and excess cash flow. Debt doesn’t seem to be one of them.

In terms of valuation, the 2.4 percent dividend yield remains the lowest among industrial REITs, while price-to-FFO is on par with peer median. With dividend payout relative to AFFO of about 50 percent, the company is prioritizing internal growth over dividend distribution.


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Source: First Industrial Realty Trust, Fast Graphs

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​

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